Supply and Demand for Natural Gas

Transcription

1 Supply and Demand for Natural Gas Presentation to: A&D Breakfast Denver, CO June 19, 2013 By: John Harpole 1

2 $10.00 $9.00 $8.00 $7.00 $6.00 NYMEX Henry Hub Natural Gas Price* Actual/Forecast** $ per MMBtu $5.00 $4.00 $3.00 $ per MMBtu $2.00 $1.00 $ Source: *Average of last three days of trading as published in the Platts Gas Daily Report ** Future forecasts based on NYMEX Henry Hub indices in Clearport Software as of 4/30/2013 2

3 Source: America s New Natural Gas, America s Natural Gas Alliance 4 3

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5 THE SUPPLY CURVE HAS MOVED According to the Potential Gas Committee, during the last two years, the future gas supply estimate for the US rose nearly 25% to a 48-year record of 2,688 TCF. 5

6 Forecasts for Shale Gas Resource? TCF - Energy Information Administration (EIA) TCF - Navigant for Clean Skies Foundation TCF - Potential Gas Committee (PGC) TCF - Energy Information Administration (EIA) ,073 TCF - Potential Gas Committee (PGC) Source: Various resource estimates 6

7 Much Of The U.S. Is Economical Even With $70 Oil IRR Across Oil, Gas & NGLs Base $85 oil, $3.50 Gas & $37 NGLs Base $85 oil, $4.00 Gas & $37 NGLs Base $70 oil, $4.00 Gas & $28 NGLs Source: Ponderosa Advisors LLC Assumes 10% cost of capital Source: Ponderosa Advisors, LLC 7

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9 Falling NGL Prices Have Minimal Impacts In Liquids Rich Areas Rate of Return on Drilling Activity Source: Ponderosa Advisors LLC Source: Ponderosa Advisors 9

10 Dry Natural Gas Production Is Expected To Grow 11.8 Bcfd Source: Ponderosa Advisors LLC Source: Ponderosa Advisors 10

11 Barnett Model for Future Shale Development 7 Barnett Gas Production Production (bcf/d) Rig Count Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Historical Gas Production (bcf/d) Rig Count Source: HPDI, RigData, TPH Estimates Dave Pursell, Tudor Pickering Holt & Co., Macro Natural Gas and Oil Thoughts presentation, May 2,

12 15% Onshore Active Rigs Are Working In Dry Gas Areas 1,327 No. Active Rigs By GPM Active Rigs By GPM (03/22/2013) Dry ( GPM) Medium ( ) Wet (> 3.0) Offshore Onshore 225 Source: Ponderosa Advisors LLC 12

13 US Production Is Up From 2012 By Almost 400 MMcfd Comparison of Dry Production Average Daily Production (Bcfd) Jan < 0.7 Bcfd Q 1 Q 2 Q 3 Q 4 Apr Jul Oct 2013 Data through January 18, 2013 Source: Ponderosa Advisors LLC 13 Source: BENTEK Supply and Demand Report

14 Faster Drilling Times Yield More Wells, More Production 3% Imp Time to Drill Production (MMcfd) 10% Imp In IP Rate Source: Ponderosa Advisors LLC 14

15 Fracturing Application Exploded Source: Chris Wright, Liberty Resources Tuesday Lunch Club Presentation, 3/5/13 15

16 10-fold growth in 10 years Source: Chris Wright, Liberty Resources Tuesday Lunch Club Presentation, 3/5/13 16

17 The Ferrari Affect Substantially Reduces The Likelihood Of Price Spikes One Rig In the Haynesville 5 months after drilling restarts, previous production level 6 Month Drilling exceeded Curtailment Source: Ponderosa Advisors LLC Source: Ponderosa Advisors, LLC 17

18 Will the Demand Side Curve Move? There is no opportunity for which we can t overcompensate. Four areas to consider: 1. CNG/NGV vehicle demand 2. Coal to gas electric gen conversion 3. New industrial demand 4. LNG Exports 18

19 1. CNG/Natural Gas Vehicles 19

20 How Many NGVs to Get to 1 BCF Per Day of Demand? The U.S. currently has about 110,000 NGVs on the road (less than 0.1% of total U.S. vehicles), mostly owned by fleets. To get to 1 BCF per day would mean a roughly ten-fold increase in the number of U.S. NGVs. It will take the right incentives and plenty of time. Let s be aggressive and say 1 BCF per day of demand by Source: Raymond James & Associates, Inc., Weekly Energy Report

21 2. Coal to Gas Electric Generation Fuel Switching 21

22 Why Care About Power Generation? Power demand historically 20-33% of total US natural gas demand Grew to 39% in 2012 Impressive but power s relative growth even more dramatic Natgas Demand by End User Commercial & Industrial 25 bcfd 20 Power 15 Residential Source: EIA Dave Pursell, Tudor Pickering Holt & Co., Macro Natural Gas and Oil Thoughts presentation, May 2,

23 Why Care About Power Generation? FY 2012 power gen gas demand increased 21% y/y with total power consumption down - 2% y/y From 1997 to 2012 power gen gas demand grew 2.25x from 11 bcfd to 25 bcfd Impressively demand peaked July 2012 at 36 bcfd Natgas Demand Growth by End User indexed 1997 = Source: EIA Dave Pursell, Tudor Pickering Holt & Co., Macro Natural Gas and Oil Thoughts presentation, May 2,

24 Coal/Gas Switching Price Driven FY 2102 Natgas gained an average 8.5 bcfd of power generation market share 2012 Switching strong but shy of our 12 bcfd theoretical $4/mmbtu gas got close (Feb-June 2012) but required <$2.50/mmbtu gas Currently switching run rate ~5+ bfcd <$2.50/mmbtu gas (Feb-June 12) makes for lots o switching Price Driven Coal/Gas Switching Gas Demand Actual vs. Baselin e Switching Estimate Coal Gas Price Spread Coal/Gas Spread $/MWh (10) (1.0) (20) (3.0) Jan 08 Mar 08 May 08 Jul 08 Sep 08 Nov 08 Jan 09 Mar 09 May 09 Jul 09 Sep 09 Nov 09 Jan 10 Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11 Mar 11 May 11 Jul 11 Sep 11 Nov 11 Jan 12 Mar 12 May 12 Jul 12 Sep 12 Nov 12 Coal/Gas Switching Bcf/d Source: EIA, TPH Research Dave Pursell, Tudor Pickering Holt & Co., Macro Natural Gas and Oil Thoughts presentation, May 2,

25 Generation Supply Stack - $3.50 Natural Gas Price Deck $60 $55 Cost of Power Production ($/MWh) $50 $45 $40 $35 $30 Coal Capacity Gas Capacity This represents 100 GW of efficient gas-fired generation. Deep in-the-money vs. much of the coal supply stack. Running full out, that s 18 Bcf/d of peak gas demand that s a lot of gas! $25 $20 50, , , , , ,000 Cumulative Capacity (MW) Source: TPHe, EIA, SNL Energy Dave Pursell, Tudor Pickering Holt & Co., Macro Natural Gas and Oil Thoughts presentation, May 2,

26 Generation Supply Stack - $4.50 Natural Gas Price Deck $60 $55 Cost of Power Production ($/MWh) $50 $45 $40 $35 $30 Coal Capacity Gas Capacity The 100 GW of gas generation that was in-the-money on the $3.50/mmbtu gas page is more expensive to run at $4.50/mmbtu gas than a similar amount of coal generation. $25 $20 50, , , , , ,000 Cumulative Capacity (MW) Source: TPHe, EIA, SNL Energy Dave Pursell, Tudor Pickering Holt & Co., Macro Natural Gas and Oil Thoughts presentation, May 2,

27 Generation Supply Stack - $4.00 Natural Gas Price Deck nat gas, the meat of the coal and gas supply stacks sit on top of each other...here it doesn t take much to tip the balance to coal or gas. This is where we are today with a lot of market share potentially up for grabs. $55 $50 $45 $40 $35 $30 Coal Capacity Gas Capacity Cost of Power Production ($/MWh) $25 $20 50, , , , , ,000 Cumulative Capacity (MW) Source: TPHe, EIA, SNL Energy Dave Pursell, Tudor Pickering Holt & Co., Macro Natural Gas and Oil Thoughts presentation, May 2,

28 3. Industrial Demand Growth (Chemical, Manufacturing, Ethane Crackers, etc.) 28

29 The Ammonia Story Current approximate economics Ammonia worth $600 per ton in world market Can be produced for $180 per ton at current U.S NYMEX natural gas price strip 14 Ammonia plants closed in the U.S. between 1998 and 2006 thanks in part to high natural gas prices Top 5 world producers would like to build new facilities in the U.S. 1 ammonia plant can consume as much as 100,000 MMBtu per day 29

30 Dow Exec Sees 90 Manufacturing Projects Planned Using 7 Bcf/d We believe the increase demand will be seen as early as * Manufacturing industry is concerned about the undisciplined export of liquefied natural gas. US manufacturing industry will not support LNG exports Source: NGI s Daily Gas Price Index, October 25, 2012 *George Blitz, Vice President of Dow s Energy and Climate Change Division 30

31 Nucor EnCana A Creative Solution A price protection deal for Nucor Steel $3.6 billion 20 year investment in 4,000 wells located in western Colorado Lack of counterparty creditworthiness drove the structure of the deal A financial investment/partnership in drilling and development was the only solution for Nucor Nucor will sell the gas in western Colorado and use the cash to purchase like volumes in Louisiana This deal structure allowed for the phased development of a $1.4 billion DRI steel mill The EnCana Nucor deal is responsible for all of EnCana s 5 drilling rigs in western Colorado and will eventually increase to 8 rigs 31

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33 Drilling Rig Productivity Continues To Improve Southwestern Energy Fayetteville Shale +621% 160, % % +123% 69% 4,942 2,373 28% ,104 1,066 18,360 $2.9 $2.1 5 Time To Drill (Days) Wells Per Yr Per Rig Average Lateral Length (Feet) 30 Day Ave. Prod Rate (Mcf/d) Unit Prod Additions Per Rig Per Yr (Mcf/d) Drill & Complete Costs ($MM) Source: Southwestern Energy Financials 33

34 4. LNG Exports 34

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37 LNG Update U.S. Department of Energy Grants Freeport LNG Non-FTA Export Approval This is the first such license granted to an LNG export facility in the U.S. since approval was granted to Sabine Pass LNG in May Source: Rob Almeida, May 17,

38 Australia LNG While we review, they build Gladstone Australia s 3 LNG plants represent $60 billion in investments 38

39 World LNG Estimated June 2013 Landed Prices 39

40 Incremental Demand/Supply Increase By 2020? 1. CNG/Natural Gas Vehicles 2. Coal to Gas 3. Industrial Demand Growth Low Case 0.5 BCF/day 5.0 BCF/day 3.0 BCF/day High Case 1.0 BCF/day 8.0 BCF/day 7.0 BCF/day 4. LNG Exports 3.0 BCF/day 6.0 BCF/day Incremental Demand Total Incremental Supply Total* 11.5 BCF/day 15.0 BCF/day 22.0 BCF/day 25.0 BCF/day *Current daily supply is 65 BCF per day. 40

41 Conclusions U.S. continues to produce more gas, shale gas revolution was too successful, end-users will benefit During the next 3 years, supply will likely exceed demand Prices will remain in the $3.00 to $4.00 range, with short period above and below that band during adjustments Long term prices depend on demand growth. Without demand growth, supply will continue to be long and prices relatively low. A significant demand response can t occur for at least 3-5 years 41

42 Conclusions (cont d) Infrastructure investment in the 4 areas of potential new demand (CNG/NGV, coal to gas, industrial demand growth, LNG exports) could take 5-8 years to be meaningful Natural gas liquids will continue to be the driving force in drilling BTU value disparity between natural gas and crude oil will continue for many years Beware of entities that are talking their own book (ie chemical and manufacturing trade associations, LNG developers, NGV advocates, etc.) Exports must become a greater part of the demand equation, with obvious political implications. 42

43 Wildcards World economy (every one is talking their own book ) Ban on hydraulic fracturing in U.S. (it is a battle city by city, town by town) Quad O The Streetlight Effect 43

44 Fracturing: Big Three Issues Waste Water Disposal: Re-injection is generally best option. Viable and safe in most all areas. Air Pollution: Industrial activity on site burning diesel like farm equipment and possible hazard from methane gas escaping (casing head gas). Community / Landowner issues. Biggest one in my opinion. Different communities evaluate tradeoffs differently. Benefit sharing is also variable. Fracture growth up into groundwater is a hyped but not real issue. Surface handling of water / chemicals is a real issue, as is casing / cement integrity. 44

45 Citations for Report All of the information utilized for this report is a compilation of information pulled from the following data sources: Ponderosa Advisors LLC Blue, Johnson Associates, Inc. Chris Wright, Liberty Resources Office of Fossil Energy Dave Pursell, Tudor Pickering Holt & Co Tudor Pickering Holt & Co Bloomberg America s Natural Gas Alliance HPDI RigData SNL Energy Office of Oil Gas Global Security Supply U.S. Department of Energy Raymond James and Associates, Inc. Charif Souki, Cheniere Energy Inc.; Cheniere Research U.S. Federal Energy Regulatory Commission Institute for Energy Research (IER) Energy Information Administration (EIA) Bernstein Research Western Energy Alliance Platts Gas Daily Report, A McGraw Hill Publication SEC Filings 45

46 Contact Information John A. Harpole President Mercator Energy LLC 26 W. Dry Creek Circle, Suite 410 Littleton, CO (303) (work) (303) (cell) 46

47 What Fracking Means to Low Income Households NYMEX 1 Avg. Price 2 /MMBtu $ NYMEX 1 Avg. Price/MMBtu $ % Drop Price Differential/MMBtu $4.41 x 2012 Residential Gas Usage 3 /MMBtu 4,179,740, Residential Cash Savings = $18,432,653,400 1 NYMEX Average last 3 days of close of Natural Gas Contract as reported in Platts Gas Daily Report 2 See Addendum A for supporting documentation Residential Gas Usage EIA Natural Gas Consumption by End Use 47

48 What Fracking Means to Low Income Households 36% of residential households (114 million total 4 ) are estimated to qualify for LIHEAP assistance Residential Cash Savings = $18,432,653,400 Percentage of Low Income Households 6 x Low Income Cash Savings = $6,635,755, LIHEAP Total Cash Assistance 7 = $2,625,000,000 4 US Census Bureau State and County Quickfacts 5 LIHEAP Home Energy Notebook for FY 2009: Appendix B: Income Eligibility Household Estimates; See Addendum A 6 Households with income up to 150% of the federal poverty income guidelines or, if greater, 60% of the state median income 7 10% decrease due to General Administrative Expense; 15% due to efficiency 48

49 The Effect of Fracking on Residential Gas Cost With the gas cost in Spain of $10.05/MMBtu, the total residential bill would have been: $ % Increase With the gas cost in China of $13.70/MMBtu, the total residential bill would have been: $ % Increase 49